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Is Land a Good Investment? A Reality Check on the Profits and Risks

Buying a home may be the American dream, but buying land—empty,
yet full of possibilities—holds an almost mythical appeal. It’s
also cheap: On average, land will cost you a mere$3,020 per
acre. Unlike avocados or iPhones, land is a finite
resource, which you’d think would shore up its value. So let’s talk
turkey: Is land truly a good investment?

The answer depends, for starters, on what you hope to do with
it. The possibilities, of course, are close to endless: You could build a cute
little cabin or your dream mansion. Or maybe you’re thinking big with your
investment, like a future condo complex or shopping mall that will reel inbeaucoupbucks.

But while land may seem as solid as an investment gets, it’s not
something you want to venture into without careful consideration of the costs
and red tape you’ll encounter. Here are some of the questions to ponder to
help you decide whether you want to forge ahead.

How can the
land be used?

Investors must consider not only the value of the land itself—in
terms of its location and price—but also its intended purpose, saysEric
Malmberg, a broker with Re/Max Advantage Plus in
Minneapolis–St. Paul, who specializes in land sales. As such, your first step
should be to check with the city or county to see if the land is zoned as
residential (homes), commercial (shopping malls), industrial (manufacturing),
or agricultural (farming). Similar to zoning laws, land can have specific
designations—say, a historical site or preserve—that limit what you can build
on it.

Whatever a land’s label, you should take it seriously,
because if you build a house on a commercial lot, a shop on
agricultural land, or some other mismatched arrangement, you’re breaking
the law. And that’s rarely a winning strategy for investments (just look at
whereBernie Madoffended up).

Can land be
rezoned?

What if the land you’re eyeing is not zoned the way you
were hoping? Many an investor has plowed ahead anyway, intending tomaximize an investment through rezoning, a
phenomenon known among investors as “future-use payday.” For instance,
maybe land that’s classified as agriculture currently has a restriction
that will be lifted and reallocated for condos once the local
population density reaches a certain level, handing a windfall to any
landowner savvy enough to see it coming.

But buyer beware, cautionsAndy Prasky, who
specializes in new construction and land development with Re/Max Advantage Plus
in Minneapolis–St. Paul.

“Investors with rezoning dreams are usually at the mercy of the
city staff,” says Prasky. “They will likely find the process to be full of
costly surprises, such as land surveys, engineering reports, wetland
delineations, watershed compliance, feasibility reports, and more.”

In short, waiting for rezoning to happen is high-risk, high-reward.
If you aren’t an experienced real estate investor or a high roller, you should
probably look to other options (read on).

Can
I make money off the land immediately?

Keep in mind that land comes with carrying costs: You’ll have to
pay taxes on it, for instance. As such, to keep your land from being a constant
drain on your finances, you’ll want to find a way for it to generate
income immediately. This can be done by planting crops or trees on it, leasing
it out for cattle, or offering up hunting rights.

“The key to holding raw land is to keep the taxes and expenses
under control,” Prasky says, adding that agricultural land has
the lowest taxes. In Minnesota where Prasky lives, for instance,
farmland sells for between $8,000 and $16,000 an acre. Rent it out to a farmer,
and the crop yields will generally reap a return on investment of about 3.75%
per year. In short, farmland is akin to a blue chip stock: It won’t make
you rich, but it does offer a slow but steady return.

What do
developers think?

But if your dreams are to build something on your land, one
professional you may want to call for advice is a developer. As a rookie
investor, you may be valuing attributes that a homeowner would look for, like
natural beauty, views, and proximity to amenities. And while these factors are
important, a developer will eye additional details such as the number of
buildable acres (which may not be all of it), expected expenses for site
improvement, and ease of getting permits and approvals.

Also keep in mind that building will cost you, a
lot. According to data from the National Association of Home
Builders, the median cost of building a home is $289,415—that’s
more than it costs to buy an existing median-price home,
at $223,000. And that’s not where your building expenses end. You’ll
also have to pay for surveys, permits, and health department approvals. What’s
more, the site must be cleared, graded, and excavated—all of which can take a
year or more to complete.

Bottom
line: Land, as an investment, may be more trouble than it’s worth. So if
you’re looking for fast and easy returns, stocks or regular real estate may be
better bets. Still, if land ownership holds some appeal, just make sure to do
your homework … and maybe grow a few soybeans to make ends meet.

On the
other hand, “Land” can represent the ideal investment for all of those that are
undecided about the type of dream home they want to have. Please remember that
as we go through the different stages in our life our views and goals change
and land can be a very safe way to guarantee your spot in a specific location
and then take your time to play with the design of that ideal dream home where
you will spend the rest of your days.

To
point out a well know State for its land sales activity, Florida has a proven
track record of consistent growth with a value proposition. The southwest part
of the state has particularly absorbed the greatest growth within the State.

“Florida
passed New York to become the nation’s third most populous state, according to U.S. Census Bureau state
population estimates released today. Florida’s population grew by 293,000 over
this period, reaching 19.9 million. The population of New York increased by
51,000 to 19.7 million”.

At last count, Florida is growing by 986
people per day.

According to the US Census Bureau, as of
July 1st, 2016, Florida’s population was 20,612,000, and New York’s
population was 19,745,000. Therefore Florida has surpassed New York by 867,000
people.

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